4 Stocks to Reduce Risk, Boost Growth

By

Sarah Max

July 26, 2018 10:11 a.m. ET

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Will Muggia
Adam Glanzman

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When a perfect storm of events in 2011 sent the Touchstone Mid Cap Growth fund and many of its sibling portfolios reeling, Will Muggia didn’t try to spin it as one bad year in a history of good ones. Instead, the president and chief investment officer at Boston-based Westfield Capital Management started looking for a risk expert.

“We still have the human element, but we have guardrails based on our process,” says Muggia, 56. “When we’re right, why are we right, and when we’re wrong, why are we wrong?” The
Touchstone Mid Cap Growth
fund (ticker: TEGAX) has since recovered from its nearly 12% drop in 2011, returning an average of 13.6% a year over the past five years, better than nearly 80% of its Morningstar mid-cap growth peers—and with more upside and less downside.

Among other risk measures, Westfield built a model based on its process and analyst track records that closely monitors each analyst’s contribution to portfolio risk relative to the benchmark, in this case, the Russell Midcap Growth Index. The model helps pinpoint how much of a position to take in a new idea and flags stocks for review. If fundamentals change or a stock falls below a set threshold, its analyst has 30 days to recommend selling, trimming, or adding to the position. “Doing nothing isn’t an option,” says Muggia, whose team has helped subadvise the Mid Cap Growth fund since its 1994 inception and took sole control in 2011.

Doing nothing is anathema to the high-energy culture that Muggia has nurtured at Westfield, which manages $14 billion, all of it in stocks. “If you don’t just love stocks, you’re not going to work here,” he says.

Muggia spent his early years living in a community near the Navajo Nation in New Mexico, where his father worked as a doctor and his mother as a nurse. The family moved back to Boston when he was in middle school, and he soon became a frequent visitor to his stockbroker uncle’s office. “I was the lone capitalist in my family,” quips Muggia, who has carried on his parents’ tradition of giving back with service-focused family vacations and work on inner-city education.

During his first job out of college—cold-calling at Kidder, Peabody—Muggia caught the attention of the head of investment banking. That led to Harvard Business School and a detour in investment banking. Determined to return to stock-picking, Muggia joined Westfield in 1994 as a health-care analyst, built out its small- and mid-cap institutional business, and in 2001 stepped up as president and chief investment officer.

The Mid Cap fund, as with all Westfield portfolios, is a compilation of ideas coming from the firm’s 17 sector analysts, who work with sector heads to vet ideas and present them in weekly investment committees; all investment decisions are made as a team. The overriding theme is finding growth at a reasonable price, but Muggia says this is a spectrum of ideas that ranges from steady secular growers that appear pricey at first glance to undervalued (but growing) cyclicals, turnarounds, or misunderstood stocks.

Veterinarian diagnostics company Idexx Laboratories (IDXX) fits squarely into the category of steady grower. Muggia’s team bought it for a small-cap portfolio in early 2009 when it was trading at $17 (split-adjusted) and added it to the mid-cap fund in 2017. It recently traded near $250. Today, even with Idexx at 44 times consensus 2020 earnings, they like it for the same reason they always have: “People view their pets as family members, and they spend accordingly,” he says, noting that the valuation is justified by 12% annual organic growth, 75% recurring revenue generated by ongoing diagnostics, and a multiple that has historically been two to three times that of the market.

As a leading player in the $8 billion global contact-lens market,
Cooper
(COO), offers a similar dynamic—a loyal following among independent eye doctors, strong and sticky recurring revenue via disposable lenses, and consistent high-single-digit organic growth. “Even during the financial crisis, they grew,” he says of the holding since 2012. After a strong first quarter, the stock dropped 6% on currency headwinds, opening a small window for Muggia and his team to add to their position. “This is a company that is growing 20% a year and trades around 17 times its 2019 earnings,” he says.

Westfield added
Pioneer Natural Resources
(PXD) to the portfolio in July 2017, thinking that the consensus had woefully underestimated oil prices—and, based on current valuations, still is. While Muggia’s team has traditionally avoided exploration-and-production companies, which are notorious for overspending when oil prices are high, they made an exception for Pioneer because of its location in the oil-rich Permian Basin and management’s focus on cost containment. “We like the global supply-and-demand outlook,” he says, “but even if we’re wrong about oil prices, Pioneer is one of the lowest-cost producers in the world.”

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Cost is also a major factor in treating cholesterol, which is one of the reasons that Muggia and his team own Medicines Co. (MDCO), a biotechnology company developing what he describes as an annual vaccine for cholesterol. The fund first bought the stock in May 2017, when it was trading in the high $30s, and added to the position last year as shares sunk into the $20s.

With U.S. Food and Drug Administration approval expected in 2020—and the potential for a Big Pharma takeover in the interim—Muggia and his team think the shares, recently $40, are more than reasonable, given the potential offered by a once-yearly treatment in the $20-billion-and-growing cholesterol-management market. “We don’t buy stocks based on [the potential for] a takeover,” he says. “But for a Big Pharma company, this could be massively accretive.”

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